Expected Completion Date:
May 2022
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Major Fields:
Financial Economics, Monetary Economics, Complexity Economics, Macroeconomics, History and Methodology of Economics
Dissertation Title:
Stock Returns, Expectation Fulfillment, and Information Theory: A Statistical Equilibrium Approach
Dissertation Abstract and Research Interests:
My doctoral dissertation aims at developing a theoretical framework to analyze the behavior of the stock market in terms of statistical equilibrium. Focusing on the distribution of stock returns over different time horizons, I make use of information theory to provide further insights into the stochastic processes underlying a specific statistical configuration of the stock market. On the one hand, my framework introduces an innovative element that goes beyond the mere econometric analysis of serial correlations in price levels. On the other, it accounts for the role of unfulfilled expectations of investors, which allows me to provide a rather different test for the Efficient Market Hypothesis.
After developing a theoretical and empirical analysis of the Efficient Market Hypothesis in the first chapter, I build the theoretical framework to provide original evidence on stock returns: the Quantal Response Statistical Equilibrium model (QRSE). The model, by deploying an entropy-based measure of information, provides a behavioral foundation for the formation of aggregate economic outcomes in social systems characterized by negative feedback mechanisms (in the case of the stock market, the effect of buying and selling actions on market liquidity).
To perform my analysis, I retrieve daily stock price data of the individual companies listed in the S&P 500. Then, I fit the model to the cross-sectional distribution of individual companies’ daily returns over bull markets, bear markets, and corrections, with reference to the period 1988-2019. Finally, by making use of the skewness of the QRSE distribution, I compute the theoretical degree of unfulfilled expectations of investors, which I empirically test by comparing it to the skewness of the empirical data.
I find robust evidence of punctuated statistical equilibrium, disrupted by structural changes affecting the stock market, as well as the presence of unfulfilled expectations over the entire sample. Furthermore, I show that randomness in stock prices is not a mere accident of nature, as the Efficient Market Hypothesis claims, but can be understood as the spontaneous convergence of the system towards a conventional rate of return, determined by unintended consequences of investors’ speculative behavior.
Contact Email:
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